A Troubling Lack of Concern

I had to keep checking to make sure there wasn't a market rally into the bell Monday -- after all, lately it's seemed that the last half-hour of the day has been reserved for buying only. Yet, on Monday, the selling persisted for the entire session.

On an anecdotal level, I found it rather curious that folks didn't seemed terribly concerned that the market gave back all of Friday's gains in one session. If this decline had occurred two weeks ago, when it should have happened, perhaps this apathetic sentiment wouldn't have been concerning -- but, at this point, it has me worried.

That said, if we look at the statistics, the put-call ratio did soar to 114%, the highest reading since Nov. 30. At the same time, the moving-average lines are all heading higher, which is bearish; here is a chart of the 10-day moving average, which is heading up from a higher low.

If you would like to know what was short-term bullish in Monday's trading, I can offer you the following. The pullback came on light volume; we saw a high Arms Index (TRIN) reading on both the Nasdaq and the NYSE; that high put-call ratio; and the fact that the Nasdaq didn't show an uptick in stocks making new lows vs. last Thursday.

The intermediate-term indicators remain overbought, and they are rolling over with negative divergences. A rally on Tuesday would not change that. In fact, we now need a rally with comparable breadth to what we saw Friday (+1600) in order for the the McClellan Summation Index to head up again.

Yet this wasn't about the U.S. It was about Europe. Several weeks ago I opined that I thought too many had taken their eyes off Europe and that it was worth paying attention here, since their stock markets had far underperformed the U.S. indices. If we again look at the ratio of the German Dax to the S&P 500, we see that is still the case; it is almost as if a switch was flipped on the first day of 2013.

With that in mind, let's go back to the chart of the Europe ETF iShares MSCI EAFE Index Fund (EFA). You can see the price has broken the uptrend line.

Perhaps it won't matter, since the European Central Bank has a meeting planned for Thursday and Super Mario Draghi (i.e., the ECB president) is bound to reiterate his promise to do "whatever it takes" to preserve the euro, as he did last summer. However, at that earlier point, the markets were at their lows, with EFA trading at $47 -- not $58 -- so this week is critical in Europe.

As for China , I realize the only thing anyone notices about it these days is the horrible smog that has draped itself over the country. However, notice that the Shanghai Composite is now up against resistance. This market hasn't done a thing wrong, but I think this proximity to resistance means this market needs a break, too. Keep in mind that the Chinese New Year begins in a few days, so this market will be closed several days next week.

Speaking of the smog, typically factories close for at least a week, often two weeks, during the Chinese New Year -- so perhaps that will help their smog situation toward the end of February.

HR

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